Banks Face Lower Fees From Smaller Debt Deals In Q2

by Trefis Team
Morgan Stanley
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The global debt industry saw companies raise $1.43 trillion through bond issues over the second quarter of the year, as captured by Thomson Reuters in its quarterly report for the industry. [1] This is a 6% decline over the $1.52 trillion companies raised in Q1 2013 – not really a surprise as the increasing likelihood of the Fed cutting down, or ‘tapering,’ its bond repurchase program towards the latter part of the quarter, coupled with the continuing unrest in Europe’s economy kept companies wary about their decision to raise money through debt markets.

The data shows another interesting trend though as the actual number of debt origination deals for the quarter was 4,466 – a good 25% higher than the figure of 3,590 deals for Q1 2013, and the highest figure for a quarter in at least three years. Taken together with the fact that there was a net decline in total deal size, this indicates that the period saw a lot of companies testing the debt market with small bond issues. The small sizes of individual deals had an obvious impact on the banks’ debt origination fees, which have shrunk 20% compared to the previous quarter for the industry as a whole.

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JPMorgan (NYSE:JPM) continues to maintain a tight grip on the debt capital market with the bank helping companies raise more money through debt originations than any of its competitors. Deutsche Bank (NYSE:DB), Citigroup (NYSE:C), Barclays (NYSE:BCS) and Morgan Stanley (NYSE:MS) are the other investment banks which feature in the list of top five debt originators for the quarter.

The table below summarizes the performance of the debt origination unit at each of these banks based on data compiled by Thomson Reuters.

Bank Rank Proceeds Mkt. Share # Deals Avg. Deal Size Q2’13 Imputed Fees Q1’13 Imputed Fees
JPMorgan 1 $104.2 B 7.3% 382 $273 M $420 M $575 M
Deutsche Bank 2 $91.3 B 6.4% 385 $237 M $300 M $405 M
Citigroup 3 $86.8 B 6.1% 351 $247 M $310 M $428 M
Barclays 4 $86.1 B 6.0% 307 $280 M $266 M $327 M
Morgan Stanley 5 $74.4 B 5.2% 363 $205 M $303 M $345 M

JPMorgan has maintained the top spot among all debt originators around the world for six straight quarters now. The bank also ranked a close #2 in terms of number of deals as it participated in 382 of 4,466 deals for Q2 2013. This represents a share of 8.5% of the market – well below the 13% figure for the last quarter. It must be noted here that the large-sized debt origination deals normally have more than one bank working on them. Hence, the market share in terms of deal volume as well as the number of deals are not mutually exclusive.

Bank of America, which ranked fifth last quarter, saw itself pushed down to sixth position by Morgan Stanley.

The average deal size among the top performers in the debt capital market remained roughly around $250 million with Barclays maintaining the highest figure of $280 million (down from $288 million for Q1). This is largely a result of the British bank’s strength in Europe and Africa.

But on considering all banks in the list of top 25 debt originators, Goldman Sachs stands out for having an average deal size of $350 million – a figure well above Barclays’ tally. The exclusive nature of Goldman’s debt origination services are responsible for this, as the investment bank is more likely to work alone in the large-sized deals it takes on.

As far as revenue from the debt offerings are concerned, JPMorgan emerges on top in that category too with imputed fees of $420 million for the period being a good 35% ahead of the nearest competitor Citigroup ($310 million). It must be noted here that imputed fees are merely an estimate based on historical data about fees demanded by the banks for a particular role in the debt origination process, and the numbers the banks actually report would differ from these figures.

But these numbers do give a good indication of what to expect. Given that imputed fees for all the banks listed above has fallen considerably in Q2 2013, compared to Q1 2013 (with most of them declining by around 25%), we can expect the banks to report considerably lower debt origination revenues for Q2.

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  1. Global Debt Capital Markets Q2 2013, Thomson Reuters Deals Intelligence []
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